Bearer Shares

“I’ll use bearer shares which nobody owns to own my corporation.” — The use of bearer shares by a U.S. citizen to obfuscate corporate ownership, where the corporation is receiving income, making investments, etc., is tax evasion, and anyone who tells you differently is probably lying. We see this varietal A LOT. Unfortunately, the IRS has been wise to this technique for about the last 30 years, and if they catch you using bearer shares (whether you hold them or not) to hide a corporation which is keeping assets or taking in income you will spend some serious Club Fed time.

But, you say, how will the IRS ever find out? There are a bunch of ways the IRS finds out, from spouses who were once trusted but now are mad, to disgruntled secretaries and staff, to folks who are just too dumb than to know better than to use their home or business telephone to call overseas, or to receive offshore bank statements at their home, or who are using someone offshore who is inept or can be bribed, or who fail to realize that all ATM machines use time-dated videocameras to . . . well you get the picture. There are a zillion possible ways for the IRS to find out about your offshore corporation, and they only need one. So just don’t use them, period.

We regularly deal with the very best licensed planners in the U.S., and they will all tell you that the use of bearer shares is a very, very bad idea. If someone suggests the use of bearer shares to you RUN-FAST-!-!-!- for they really don’t have the first clue about what they are doing, and are suggesting an act so amateurish as to belie even a hint of real competence on their part.

Notably, many of the offshore trust companies and offshore company formations company will advocate the use of bearer shares (so much so that even when we form a fully-disclosed offshore corporation and have specified the shareholders, that they will sometimes send us bearer shares simply because they are in the habit of sending bearer shares to their other clients). Keep in mind that these offshore “professionals” have no real knowledge of U.S. tax law, any more than a plumber understands a nuclear reactor because it has a lot of pipes. That they tell you bearer shares will protect you, will not keep you from going to the Big House.

Needless to say, we — and every other knowledgeable and experienced U.S. planner we know — avoids the use of bearer shares.

Background

Bearer shares are corporation stock certificates which are owned simply by the person who holds them, the “Bearer”.

When corporations first came into existence, most shares were bearer shares. If you wanted to protect your interest in the corporation, you had to protect your bearer share certificates. To protect against theft and fraud, corporations starting keeping a register of the owners of the bearer shares which were issued, and notice had to be sent to the secretary of the corporation to record the change in ownership. Eventually, the corporation’s stock ledger determined ownership, and shares only facilitated the transfer of ownership (and, indeed, today few people ever see the stock shares they own). Eventually, most U.S. states even dropped the provisions allowing bearer shares.

But recently they have made a comeback, spurred on by the so-called asset protection sector and those seeking privacy. Nevada, for instance, has built a healthy incorporation industry because Nevada corporation law allows bearer shares.

And the offshore jurisdictions have always allowed bearer shares; indeed, almost all the offshore corporation providers presume that offshore corporations will be issued with bearer shares only (and often send our clients corporations with bearer shares even when we specifically request otherwise).

But does the fact that you can get a corporation with bearer shares both in the U.S. and in the offshore jurisdictions mean that you should use bearer shares? No — except in very specific circumstances you should avoid them like the plague.

For bearer shares suffer from a couple of very serious defects.

Presumption of Ownership — Asset Protection

Of course, most structures utilizing bearer shares are for tax avoidance/evasion (or as Denver attorney Barry Engel says, “avoision”) purposes, and asset protection only plays a secondary role (if at all). However, sometimes bearer shares are utilized primarily for asset protection purposes.

In either case, this is discouraged. Our real-world experience both in attacking and defending bearer share structures is that judges eventually gravitate towards the position that if they can’t figure out who owns the corporation, they will presume that the defendant owns the corporation — then the bearer shares become counterproductive because the burden is on the defendant to prove that someone else owns the corporation.

The Upshot: You are much better off having some identifiable person own the corporation (even if only in a nominee capacity) than you are to have nobody own the corporation.

Presumption of Ownership — Income Tax

The first horrible tax trap for bearer shares is the IRS’s ability to make a jeopardy assessment that the entire value of a bearer instrument is income, if the IRS catches you in possession of the instrument and you have denied ownership.

For instance, let’s assume that you make $10 million on a stock deal, and like a good taxpayer pay your capital gains tax in that year. But then — because you fear divorce — you take your $10 million and you put it into a Bahamas IBC which is owned by bearer shares. The $10 million grow to $20 million in a couple of years. Unfortunately, your wife gets into your safe deposit box, and the IRS finds out about the bearer shares. Under IRC 6867, the IRS simply taxes the entire amount (not just the growth) at 39.6% plus penalties. And you will probably spend the remaining amount for criminal defense attorneys to fight the subsequent charges of tax evasion.

Gift Taxes

The second horrible tax trap is this: Every time bearer shares are handed over to and from a U.S. person — except for a bona fide sale for value — gift taxes must be paid! And, of course, if there is a sale then capital gains taxes must be paid.

For example, let’s say you have $10 million in the Bahamas IBC as set forth above. You think you are about to get divorced, so you give the shares to your brother to hold for awhile. In the divorce proceedings, you answer “no” when asked if you own any foreign stock interests. After the divorce proceedings are over, your brother gives the shares back to you. Easy enough, eh?

Not quite. From a federal gift tax standpoint, in approximate numbers here’s what happened:

First, when you gave the bearer shares to your brother, you triggered a 55% gift tax, meaning that you now owe $5.5 million to Uncle Sam.

Second, when your brother gave the bearer shares back, he triggered a 55% gift tax (again on the $10 million value), meaning that he now owes $5.5 million to Uncle Sam.

Thus, your simple little transfer to your brother and back triggered a total of $11 million in federal gift tax liability to you and your brother — meaning that you and your brother are now $1 million in the hole! Needless to say, you would have done much better to split the $10 million with your ex-spouse in the divorce proceedings.

And if you don’t report and pay the taxes generated by handing these shares back-and-forth it is big-time tax evasion. So, if you hear someone talk about bearer shares, ask them whether giving the shares to someone triggers federal gift taxes. If they say either “no” or that they don’t know, then they have sufficiently displayed their ignorance in this area such that you should be quickly running away from them.

Foreign Transaction Reporting

Additionally, the unreported transfer of bearer shares across the U.S. border can be argued to violate the Treasury Department requirements for transactions in excess of $10,000, i.e., if you hold bearer shares for a corporation having more than $10,000 in value, you must report the shares when you bring them into or take them out of the country, or else face steep fines and possible criminal penalties.

Bearer Shares Are A Tool

Notwithstanding the foregoing, bearer shares are a tool and in certain circumstances can serve their purposes. But they should be avoided most planning purposes, and when they are utilized the downside should be carefully discerned in advance.